Test Bank Financial Management for Public, Health, And Not-For-Profit Organizations 4th Edition Steven a. Finkler

Test Bank Financial Management for Public, Health, and Not-for-ProfitOrganizations 4th Edition Steven A. Finkler Download full at: https://testbankdata.com/download/test-bank-financial- management-public-health-not-profit-organizations-4th-edition-steven-finkler/ NEW YORK UNIVERSITY ROBERT F. WAGNER GRADUATE SCHOOL OF PUBLIC SERVICE CORE-GP.1021: Financial Management Final Examination Professors Smith and West Fall 2011 SOLUTIONS Name: _____________________________________________________________________ Student ID: _________________________________________________________________ Wagner Student Mailbox No.: __________________________________________________ (If you are not a Wagner student, please write “Non-Wagner”) Please circle the lecture you normally attend: Tuesday Tuesday Wednesday 12:30 pm 6:45 pm 12:30 pm Smith West Smith Instructions: 1) Please turn off your cell phone. 2) Print your initials at the top of each page. 3) You may use one double-sided page of notes. Put away all other written materials. 4) You may use, but not share, a calculator. Graphing calculators are not allowed. Be sure to clear your calculator before each calculation. 5) Write clearly, show your work, and circle your final answer. Only one answer will be accepted for each problem. 6) When you are done, hand in your exam, transactions worksheet, financial statements, and your one page of notes. Good luck! =============================================================== This section for graders: 1 _____12______ 2 _____12______ 3 _____12______ 6 _____12______ 7 _____11______ 8 _____12______ 9 ______3______ 10 _____7______ 11 _____6______ 12 ____13______ Initials: ____________ Total Exam Points _____________ x 40% of Course Grade = Course Points _____________ 1 Initials: ____________ Section 1: Multiple Choice and Short Answers (36 points) 1. (2 points) A not-for-profit opera company purchased a new lighting rig for $275,000 exactly two years ago. The lighting rig is expected to have a useful life of 10 years and a salvage of $25,000. The net book value for the lighting rig that would be reported on the balance sheet today is (circle one): a) $25,000 b) $50,000 c) $225,000 [2] d) $250,000 2. (2 points) In order to retain their tax-exempt status, not-for-profit organizations are required to have two authorized signatures on all checks they issue above a specific dollar threshold. a) True b) False [2] 3. (2 points) Which generally accepted accounting principle (GAAP) would require a not-for- profit organization to assign a dollar value to all the donated goods it received throughout the year? The Money Denominator Principle [2] 4. (2 points) Assuming an organization operates at a profit during the fiscal year and has liabilities, its return on net assets ratio (change in net assets / total net assets) will always be greater than its return on assets ratio (change in net assets / total assets). a) True [2] b) False 5. (2 points) The following organizations must prepare a statement of functional expenses as part of their audited financial statements (circle all that apply): a) Not-for-profit organizations b) Not-for-profit hospitals c) Voluntary health and welfare organizations [2] d) State and local governments Subtract 1 point for each incorrect answer [minimum = 0]. 6. (2 points) Investment income earned from an endowment should always be classified as temporarily restricted. a) True b) False [2] 2 Initials: ____________ 7. (2 points) In a state government’s comprehensive annual financial report, which of the following might appear on the government-wide statement of net assets (circle all that apply): a) Bonds Payable [1/2] b) Property, Plant, and Equipment, net [1/2] c) Taxes Receivable [1/2] d) Wages Payable [1/2] 8. (4 points) A not-for-profit hospital’s fiscal year ends on December 31st. On January 1st, 2007, the hospital took out a bank loan for $750,000. The loan has an annual interest rate of 6% and requires that the hospital repay the loan principal in 15 equal payments made annually on the last day of the fiscal year. Interest is paid separately. Loan repayments began on the last day of FY 2007. Assuming the bank loan is the hospital’s only debt, what are the current and long-term portions of notes payable that would be shown on the balance sheet as of the last day of FY 2011? Write your answers in the spaces below. Amount of annual loan repayment = $50,000 Number of annual loan repayments made as of the last day of FY 2011 = 5 $750,000 – ($50,000 * 5) = $500,000 = outstanding loan principal as of the last day of FY 2011 Current Portion: ___$50,000__[2]______ Long-Term Portion: ___$450,000__[2]_____ 9. (6 points total) The National Arts Society (TNAS), a not-for-profit organization that provides grants to arts programs, distributes coffee mugs to individuals who donate over $50 to the organization annually. TNAS began FY 2011 on July 1st with 20 mugs valued at $47 in total. On September 1st, the organization purchased an additional 100 mugs at a cost of $2.60 per mug. On December 15th, TNAS took advantage of a promotional offer from a vendor and purchased an additional 50 mugs for $105 in total. At the end of FY 2011, TNAS had 45 mugs remaining in its inventory. The organization uses LIFO. a) (3 points) What is The National Arts Society’s supplies expense for FY 2011? Beginning Balance + Purchases - Consumption 20 * $2.35 = $47.00 (100 * $2.60) + (50 * $2.10) = (50 * $2.10) + (75 * $2.60) = $365.00 $300.00 [3] b) (3 points) What is The National Art Society’s inventory balance at the end of FY 2011? Ending Inventory (25 * $2.60) + (20 * $2.35) = $112.00 [3] 3 Initials: ____________ 10. (12 points total) Show the impact of each transaction using the modified accrual basis of accounting. Be sure to label each fund: a) (5 points) On the first day of the fiscal year, Capital City’s capital project fund borrowed $150,000 from the general fund. It then purchased 3 new snow removal trucks that cost $50,000 each. The trucks are expected to have a useful life of 10 years and no salvage value. Assets = Liabilities + Fund Balance General Fund Cash [1/2] (150,000) Due from Capital Projects Fund [1] 150,000 Capital Project Fund Cash [1/2] Due to General Fund [1] 150,000 150,000 Capital Outlay Expenditure: Cash [1] Snow Removal Trucks [1] (150,000) (150,000) Subtract 1/2 point if "fund balance" is labeled as "net assets." Subtract 1/2 point if "expenditure" is labeled as "expense." Subtract 1 point if funds are not labeled or are labeled incorrectly. Subtract 1 point for each additional transaction shown. Subtract 2 points if depreciation is shown. b) (1 point) Using accrual accounting, the transaction in part (a) would have been recorded the same. a. True b. False [1] c) (5 points) Each year, Capital City is legally required to transfer $900,000 from its general fund to its debt service fund. It transferred the full $900,000 due this year, plus an additional $200,000 that was required to be transferred the previous year. Assets = Liabilities + Fund Balance Due to Debt Service Fund Transfer to Debt General Fund Cash [1/2] [1] Service Fund [1] (1,100,000) (200,000) (900,000) Debt Service Fund Cash [1/2] Transfer from General Fund [1] 1,100,000 900,000 Due From General Fund [1] (200,000) Subtract 1/2 point if "fund balance" is labeled as "net assets." Subtract 1 point if funds are not labeled or are labeled incorrectly. Subtract 1 point for each additional transaction shown. d) (1 point) Using accrual accounting, the transaction in part (c) would have been recorded the same. a. True [1] b. False 4 Initials: ____________ Section 2: Financial Statement Preparation (35 points) The Science Learning Institute (SLI), a not-for-profit educational center that provides science tutoring to middle school students, uses accrual accounting to prepare its annual financial statements. The SLI ended FY 2010 with the following balances in its accounts: Accounts Payable 0 Cash 103,100 Grants Receivable, net 35,100 Inventory 2,300 Net Assets 273,500 Notes Payable 595,000 Pledges Receivable, net 10,000 PP&E, net 735,000 Wages Payable 17,000 The SLI recorded the following transactions during FY 2011, which ended on August 31, 2011. 1. SLI took out an $850,000 bank loan on September 1, 2007. The loan has an annual interest rate of 6.5% and is the only borrowing the organization has done since its inception. Principal repayments are due in 10 equal installments beginning on the last day of FY 2008. Interest payments on the loan must be made in full on the last day of the fiscal year. SLI is in full compliance with the terms of the loan. 2. SLI used the proceeds from the bank loan to purchase its office space on March 1, 2008. The office space cost $775,000. It is expected to have a useful life of 25 years and no salvage value. The organization uses the straight-line method of depreciation. 3. On the first day of FY 2011, SLI purchased new classroom equipment worth $20,000. The equipment is expected to have a useful life of 8 years and a salvage value of $2,000. Equipment and furniture SLI purchased in previous years depreciated by $9,000 in FY 2011. 4. SLI earned $325,000 in state grants during FY 2011, spread evenly throughout the year. This was an increase from the $304,200 in state grants that SLI earned evenly throughout FY 2010. In both FY 2010 and FY 2011, the state paid SLI with a six-week lag. 5. During FY 2011, SLI received $75,000 in donor pledges, 80% of which was collected in cash. The organization also collected $7,500 in outstanding pledges from the previous fiscal year. SLI has a policy of writing down 2% of its total outstanding pledges at the end of the year as bad debt. 6. SLI’s employees earned $17,500 per month in FY 2011, a monthly increase of $500 from FY 2010. In both FY 2010 and FY 2011, SLI paid its employees with a one-month lag. 7. During FY 2011, SLI ordered $40,000 worth of classroom supplies on credit and used $35,000 of those supplies throughout the year. At the end of FY 2011, SLI still owed its vendors $7,000 for the supplies it ordered. 8. SLI pays $900 a month in utilities. Utilities are paid timely. 5 Initials: ____________ Record these events on the transactions worksheet template that was provided separately and then create a balance sheet, activity statement, and cash flow statement for FY 2011 on the pages that follow. ** You will not be graded on the transactions worksheet; however, you must turn in your transactions worksheet in order to receive ANY credit for Part II of the exam. (You may use the space below for notes and calculations; however, nothing written on this page will be graded.) 6 Initials: ____________ Prepare your balance sheet on this page (12 points) (Hint: To receive full credit, you do not need to report the previous year’s (FY 2010) balances on the balance sheet, but we recommend that you do so anyway because it will help you prepare the cash flow statement.) Science Learning Institue Balance Sheet As of August 31, 2011 Assets 2011 2010 Cash $96,225 $103,100 [1] Grants Receivable, net 37,500 35,100 [1] Pledges Receivable, net 17,150 10,000 [1] Inventory 7,300 2,300 [1] PP&E, net 712,750 735,000 [1] TOTAL ASSETS $870,925 $885,500 Liabilities and Net Assets Accounts Payable 7,000 0 [1] Wages Payable 17,500 17,000 [1] Notes Payable 510,000 595,000 [1] TOTAL LIABILITIES $534,500 $612,000 TOTAL NET ASSETS $336,425 $273,500 [1] TOTAL LIABILITIES AND NET ASSETS $870,925 $885,500 Points above refer to 2011 numbers only. Showing 2010 numbers is optional. Award 1 point for heading. Award 1 point for correct format. Award 1 point if assets = liabilities + net assets. Total = 12 points Subtract 1 point for incorrect order of liquidity of assets (but OK to put pledges receivable before grants receivable). Subtract 1 point for incorrect order of liabilities (but OK to put wages payable before accounts payable). Subtract 1 point for each additional asset or liability shown. 7 Initials: ____________ Prepare your activity statement on this page (11 points) Science Learning Institute Activity Statement For the Year Ending August 31, 2011 Revenues and Support State Grants 325,000 [1] Donations $75,000 [1] Total Revenue $400,000 Expenses Wages 210,000 [1] Interest 38,675 [1] Supplies 35,000 [1] Utilities 10,800 [1] Bad Debt 350 [1] Depreciation 42,250 [1] Total Expenses $337,075 Change in Net Assets $62,925 [1] Net Assets, Beginning $273,500 Net Assets, Ending $336,425 Award 1 point for heading. Award 1 point for format. Total = 11 points Subtract 1 point if any revenue labels are followed by the term "receivables." Subtract 1 point if supplies expenses is labeled as "inventory" (or anything else). Subtract 1 point if expenses are shown as negative. Subtract 1 point if depreciation expenses are shown individually. Subtract 1 point for each additional revenue or expense shown. 8 Initials: ____________ Prepare your cash flow statement on this page (12 points) Science Learning Institute Cash Flow Statement For the Year Ending August 31, 2011 Cash from Operating Activities Change in Net Assets $62,925 [1] Depreciation 42,250 [1] Changes in Non-Cash Current Assets Grants Receivable, net (2,400) [1] Pledges Receivable, net (7,150) [1] Inventory (5,000) [1] Changes in Current Liabilities Accounts Payable 7,000 [1] Wages Payable 500 [1] Net Cash from Operations $98,125 Cash from Investing Activities Equipment Purchase (20,000) [1] Net Cash from Investments ($20,000) Cash from Financing Activities Loan Repayment (85,000) [1] Net Cash from Financing ($85,000) Net Change in Cash ($6,875) [1] Cash, Beginning $103,100 Cash, Ending $96,225 Award 1 point for heading. Award 1 point for format. Total = 12 points. Subtract 1/2 point for each incorrect sign. Subtract 1 point if an item is shown under the wrong heading (e.g., Loan Repayment is shown under Cash from Operating Activities). Subtract 1 point if interest is shown under Cash from Financing Activities. 9 Initials: ____________ Section 3: Financial Statement Analysis (29 points) All questions in this section reference the FY 2010 financial statements of the American Diabetes Association (ADA). For questions 1 through 5, please select the appropriate ratio from the following list, and make sure to include units of analysis in your answers when appropriate (days, $, %, etc.). Cash from Operations + Interest Expense Cash-Flow Coverage = Interest Expense + Debt Payments Current Assets Current Ratio = Current Liabilities Total Liabilities Debt to Equity = Total Net Assets Program Service Expenses Program Services Ratio = Total Expenses Unrestricted Revenues and Support Receivables Turnover = Total Receivables Change in Net Assets Return on Net Assets = Total Net Assets 1. (3 points) As Finance Director for the American Diabetes Association (ADA), you want to calculate the organization’s profitability. a. Which ratio provides this information? Return on Net Assets [0.5] b. What is the value of this ratio for FY 2010? Show your work, and circle the answer. Change in Net Assets 7,659 Return on Net Assets = = = 10.07% [1.5] Net Assets 76,089 Subtract 1/2 point if ratio is not shown as a percentage (but OK if expressed as .10 or .1007). c. Has ADA’s profitability improved or deteriorated since FY 2009? Improved (ratio was 1.33% in FY 2009) [1] 10 Initials: ____________ 2. (4 points) Now, you want to determine whether ADA’s liquidity is sufficient. a. Which ratio measures liquidity? Current Ratio [0.5] b. What is the value of this ratio for FY 2010? Show your work, and circle the answer. = Current Assets 12,132+10,533+1,454+4,117+35,763(1) Current Ratio = = 1.49 [2.5] Current Liabilities 15,733+6,080+9,324+11,849(2) OK if the current portion of contributions receivable is given net of the allowance for doubtful accounts (C/R is $32,400 instead of $35,763) (current ratio = 1.41). OK not to include the line of credit ($6,080) as a current liability because its renewal is expected and there is no “clean up” policy (current ratio = 1.73). OK if both allowance for doubtful accounts is subtracted from the current portion of contributions receivable AND the line of credit is omitted as a current liability (current ratio = 1.64). c. Does the ratio you calculated in part (b) compare favorably or unfavorably to the rule of thumb for this ratio? Write “none” if there is no rule of thumb. Unfavorably (should be at least 2) [1] 3. (3 points) A creditor will evaluate the extent to which ADA is leveraged. a. Which ratio will the creditor use? Debt to Equity [0.5] b. What is the value of this ratio for FY 2010? Show your work, and circle the answer. Total Liabilities 42,986 Debt to Equity = = = 0.56 [1.5] Total Net Assets 76,089 Subtract 1/2 point if ratio is given as a percentage or labeled as dollars ($). c. Does the ratio you calculated in part (b) compare favorably or unfavorably to the rule of thumb for this ratio? Write “none” if there is no rule of thumb. Favorably (should be less than 1) [1] 11 Initials: ____________ 4. (3 points) The Operations Manager would like to evaluate how efficiently ADA collects on amounts that are owed to the organization. a. Which ratio should the Operations Manager use? Receivables Turnover [0.5] b. What is the value of this ratio for FY 2010? Show your work, and circle the answer. Unrestricted Revenues and Support 144,417(3) Receivables Turnover = = = 2.45 [1.5] Total Receivables 59,004 Subtract 1/2 point if ratio is given as a percentage or labeled as dollars ($). c. Does the ratio you calculated in part (b) compare favorably or unfavorably to the rule of thumb for this ratio? Write “none” if there is no rule of thumb. None [1] 5. (3 points) Finally, you want to calculate ADA’s ability to make debt service payments. a. Which ratio should you use? Cash-Flow Coverage [0.5] b. What is the value of this ratio for FY 2010? Show your work, and circle the answer. Cash-Flow Cash from Operations + Interest Expense 1,956(4) = = = 0.39 [1.5] Coverage Interest Expense + Debt Payments 5,012(4) Subtract 1/2 point if ratio is given as a percentage or labeled as dollars ($). c. Does the ratio you calculated in part (b) compare favorably or unfavorably to the rule of thumb for this ratio? Write “none” if there is no rule of thumb. Unfavorably (should be at least 1) [1] 12 Initials: ____________ 6. (2 points) What percentage of ADA’s program expenses was for Research in FY 2010? Show your work. 42,638/141,594 = .3011 or 30.11% [2] 7. (3 points) What was the percent change in the size of ADA’s endowment from FY 2009 to FY 2010? Show your work. Percent Change = (This Year – Last Year) / Last Year(5) = (21,856 – 20,660) / 20,660 = .058 or 5.8% [2] 8. (2 points) As of FY 2010, ADA offers most of its employees a defined benefit pension plan. a. True b. False [2] – See Note 14, page 19. 9. (2 points) ADA did not have a research program in FY 2010. a. True b. False [2] – See Note 12, page 18. 10. (2 points) ADA did not purchase any property, plant, and equipment during FY 2010. a. True b. False [2] – As shown in “Cash flows from investing activities” on the cash flow statement. 11. (2 points) In FY 2010, the time or purpose restrictions on $50,336,000 in net assets expired. c. True d. False [2] – The Statement of Activities shows $34,694,000 in net assets were released from restriction in FY 2010. 13 Initials: ____________ TRANSACTIONS WORKSHEET FOR PART 2 Science Learning Institute, Transactions Worksheet, FY 2011 Assets Liabilities Net Assets Grants Pledges Accounts Wages Notes Cash Receivable, net Receivable, net Inventory PP&E,net Payable Payable Payable Net Assets Beginning Balance $103,100 $35,100 $10,000 $2,300 $735,000 $0 $17,000 $595,000 $273,500 1 (38,675) (38,675) Interest Expense (85,000) (85,000) 2 (31,000) (31,000) Depreciation Expense 3 (20,000) 20,000 (2,250) (2,250) Depreciation Expense (9,000) (9,000) Depreciation Expense 4 35,100 (35,100) 325,000 325,000 State Grants 287,500 (287,500) 5 75,000 75,000 Donations 60,000 (60,000) 7,500 (7,500) (350) (350) Bad Debt Expense 6 210,000 (210,000) Wages Expense (17,000) (17,000) (192,500) (192,500) 7 40,000 40,000 (35,000) (35,000) Supplies Expense (33,000) (33,000) 8 (10,800) (10,800) Utilities Expense Ending Balance $96,225 $37,500 $17,150 $7,300 $712,750 $7,000 $17,500 $510,000 $336,425 NOTES FOR PART 3 (1) Cash and cash equivalents + Accounts receivable + Inventory and supplies + Prepaid expenses and other assets + Contributions receivable within one year. ADA includes all current/short-term investments in “cash and cash equivalents” (see Note 3, bottom page 7). Doubtful accounts are not accounted for because ADA does not provide the allocation basis (percentage) and therefore we cannot determine the amount that applies to FY 2010 receivables. (2) All liabilities are included. Though the line of credit has no “clean up” policy, it may expire in 2011, and it has a high position on the balance sheet. Deferred revenues are generally recognized over the term of a year (see Note 3, page 9, paragraph 3). (3) Net of “Total fees from exchange transactions” (50,073). (4) Interest expense on the line of credit is $72,000 (see Note 16, page 20, paragraph 1). No other interest expense is reported. (5) See Note 11, page 17. 14